Corporate counsel is the first line of defense when a forensic accountant comes armed with a court order seeking production of documents. The battleground is the law of privilege.
Regrettably, many of the assumptions about privilege may be untrue when you are served with a court order by a bailiff accompanied by a forensic investigator. While the law varies between jurisdictions, several common misconceptions are usually evident.
First, legal advice given by patent agents or accountants is not protected. Business or strategic advice given by a business lawyer is not privileged. Only the provision of legal services or legal advice between a lawyer and his client in a confidential setting can qualify for privilege. The presence and inclusion of “outsiders” such as the auditors, extraneous employees, or directors of subsidiary corporations may destroy privilege. Privilege may also be forfeited inadvertently by a client referring to legal advice in an e-mail (or string of e-mails), in a press release, or in response to a demand letter. Business lawyers who mix business with legal advice at a meeting also invite waiver of privilege.
Another common misconception is that internal investigations conducted by corporate counsel are privileged. Solicitor-client privilege does not protect communications to counsel during the investigation, assessment and decision stages of an investigation. It only protects the legal opinion of the solicitor that arises from that investigation.
Business lawyers often confuse their obligation to keep their client’s business affairs confidential with their client’s right to claim privilege. A document that was not privileged initially or which is not per se a legal document does not become privileged simply because it comes into the possession of a lawyer. Transactions are acts, not privileged communications, so that all transactional documents are not covered by privilege unless they contain legal advice. This includes moving funds in and out of a lawyer’s trust account. Therefore, business lawyers may be required to produce their files and give evidence with respect to transactions that they are involved in. That is, evidence as to the facts, not as to their advice.
In “without prejudice” settlement discussions, business lawyers often try to claim the impecuniosity of their clients. But admissions of client insolvency and assertions that the client may declare bankruptcy if settlement terms are not agreed upon may be admissible in bankruptcy proceedings. Settlement privilege is also not engaged where there is no dispute between the parties. Thus, for example, no privilege is attached to discussions about the terms upon which an employee might leave employment where no dispute has yet arisen. Nor is privilege engaged where no attempt at compromise or settlement is part of the communication, such as in a demand letter. On most occasions, the forensic accountant can simply ignore the use of the term “without prejudice,” as counsel and clients alike often misuse this term.
There is also no privilege where a client seeks a business lawyer’s assistance to either commit a wrongful act or prevent its discovery. Therefore, otherwise privileged communications may not be privileged if a prima facie case can be made that legal services were used to facilitate a fraud or other intentional tort.
While most counsel are aware that joint clients cannot claim privilege between themselves, they overlook the possibility that one of the joint clients may have a receiver appointed over its affairs, and that the receiver (acting for an outsider to the joint relationship) may ask for other privileged communications in the lawyer’s file. Another tactic is to sue one of the joint clients as a conspirator in order to encourage their cooperation in sharing what otherwise would have been a privileged communication. In a related vein, many counsel forget that disclosure of otherwise privileged documents to secure a favorable plea from government prosecutors, or as part of an exchange of documents with a private party bound by a confidentiality agreement, may waive any ability to claim privilege to those documents against other parties.
Finally, and perhaps most importantly, the law of privilege is usually considered a procedural rule that depends on the lex fori, meaning that cross-border transactions give forensic accountants the opportunity to forum shop for a jurisdiction with a narrow view of privilege in a world where the law of privilege varies widely between provinces and countries.
What does this mean? Sometimes it means that the corporate entity has no privilege to protect itself. Sometimes it even means that corporate counsel will become a primary witness against the client. And it strongly suggests that every business lawyer must become an expert on the law of privilege and its limitations before a forensic investigator comes knocking on the door.